Why Paying Off Your Mortgage Is a Terrible Idea and What You Should Do Instead

Andrew la Fleur: You have some extra money and you’re thinking about taking that money and using it to pay down your mortgage. Find out why that’s a terrible idea and what you should do instead on today’s episode.

Speaker 2: Welcome to the True Condos podcast with Andrew la Fleur, the place to get the truth on the Toronto condo market and condo investing in Toronto.

Andrew la Fleur: Hi, welcome back to the show. Thank you very much for listening. You are awesome. On today’s episode I want to talk about this question of paying off your mortgage. Is that a good thing to do or in fact is it a terrible thing to do? Well, I think you know where I land on that side of the debate. I think that paying off your mortgage is a terrible idea and I’m going to tell you what you should do instead. This all came about because I heard about somebody recently who had sold off an investment property actually against my advice. They sold off this investment property that was paying them fantastic cashflow every month.

It had gone up a lot in value and they just wanted to cash out. What were they going to do with the proceeds? I heard that they were going to pay off their mortgage or pay off a significant portion of their mortgage on their home, on their principal residence, with the proceeds. I just thought to myself, “Wow, that is such a missed opportunity.” It’s not the worst thing in the world, of course, but such a missed opportunity to take those funds and pay off a mortgage instead of investing it in another property or several properties.

Here are a few, and on that vein it’s something that’s come up a lot. I want to talk about a few reasons why paying off your mortgage is a terrible idea and what you should do instead. Number one, debt is not bad. Let me tell you if you haven’t heard it already, if you don’t know, debt is not bad. There’s this perception out there, particularly with I want to say the Canadian culture, if I’m allowed to say that, the people who are born and raised in Canada, the conservative Canadian mindset. There’s this belief that debt is bad that if you owe somebody money, if you have a mortgage that that’s something you want to get rid of as fast as possible. It’s like this itch you need to scratch and it’s just somehow when that is gone, your life will just be so much better.

Debt is not bad though. Bad debt is bad. Good debt is good. There’s good debt and there’s bad debt. Debt that’s used to buy assets like real estate, like cash flowing, income producing real estate, that is good debt. That is debt used to grow your wealth and to eventually accelerate the time where you are in a sense financially free. You can be financially free and have massive amounts of debt. Those two things do not have to, they’re not mutually exclusive things. There seems to be this mentality that if you have a mortgage, if you have debt, then somehow that’s bad. Debt that’s used to buy things like cars or vacations or shoes or whatever, that is bad debt. That is money that you’re borrowing for things that you will never see that money again. You’re never going to get that money back. It’s not an asset that’s going to appreciate in any way.

It’s just you are just throwing money away on top of money because you’re borrowing and paying interest as well as getting something that is decreasing in value. That’s the first thing is just understand that debt is not bad. If you were raised like that to believe that debt is bad, I hear you. I was raised in that sense somewhat as well, coming from a conservative, financially conservative family background. It’s taken many years to understand the other side of it and how debt can be used to your advantage and how debt can be used to grow your wealth. This is all part of the journey that we’re on.

The second reason why paying off your mortgage is a terrible idea is that interest rates now are at all time lows. Again, we’ve been this way for the better part of a decade now. We need to remind ourselves that the interest rates that we have right now, for mortgages especially, are not normal by any historical standards. They’re at the lowest rate they’ve been for decades if not ever. When you’re able to borrow money at such low, low rates of be it 1, 2, 3%, whether it’s 2.7 or 2.9 or 2.3, whatever it is, I mean we freak out about little .2% changes in mortgage rates. The reality is that we’re at all time lows and we’ve been here for many years. The time to take advantage of that is now, to take advantage of these lower interest rates.

People in the 80’s and 90’s were paying double digit interest rates was normal. There was a time when 12% interest was considered very, very good, many stories of people in the early mid-80’s paying up to 20, 21, 22% interest. I mean it’s absolutely unheard of in today’s world but that was reality for many, many years for an entire generation of people. With interest rates being so low, this is the time to use that to your advantage, to our advantage as investors. Just one simple example, like if you’re able to buy a property, if you’re just starting out in the market and you want to buy something for yourself to live in, do it. Get into the market as soon as, as fast as you can. The market is moving so quickly.

Even if you just can scrape together a 5% down payment, do it and get into the market. Get your 5% out there, buy something, start paying down your mortgage, paying it every month bit by bit. If your typical mortgage on a five year term, after five years of paying down a mortgage with today’s low, low interest rates, you’re going to have around 20% equity in the property after five years just for paying your mortgage every month. You’re going to go from 5% to 20%. That’s not even including any appreciation that might happen on the property, which is very, very likely to happen, of course. Again, if your interest rates are 6, 8, 10%, then that is not the case, but because interest rates are so low, you’re paying more and more principal than you normally would on a mortgage so that’s again a huge reason to have a mortgage today and to maximize your mortgage wherever you can.

The third reason why paying off your mortgage is a terrible idea, number three is that dead equity is dead. Dead equity is dead. What I mean by that is the equity, when you pay your mortgage down, you have this equity in the property, it doesn’t do anything for you. It doesn’t put food on your table so to speak. It doesn’t get you around in a nicer vehicle or anything. It doesn’t improve your life in any way when you can say, “I have $500,000 of equity in my house,” versus “I have $100,000 in equity in my house.” At the end of the day it doesn’t matter. It doesn’t affect your life in any way. That money, that equity that you have, is just sitting there in your house doing nothing. It’s doing nothing for you.

When you use that extra money that you have to pay down your mortgage, you’re basically putting that money in jail. That money is like you’re putting it in jail and it’s locked up and there’s nothing that you can do with it. You cannot enjoy it. It cannot come out and play with you. Free up that money. Free up that equity. Release that equity. Get it out into the marketplace. Invest that equity whenever you can in the form of refinancing. Obviously, you don’t want to have no equity in a property. That’s extremely risky but you don’t want to have too much equity in the property either. You want to minimize the amount of equity that you can in a property and invest, invest, invest, invest.

The final reason why paying off your mortgage is a terrible idea is just basically the concept that this is how the rich get richer. It’s through debt. It is through other people’s money, OPM, other people’s money, not through your own money. You look at, you study how wealthy, extremely wealthy people got to where they are, it is always, always, always through, of course, hard work and smarts and a little bit of luck, of course, but it’s through using debt. It’s through using other people’s money, taking on investors in projects who give them money to do something with it. It’s the same principle here with mortgages and paying down your mortgage.

With a refinancing example, if you can borrow and have debt at say 2.5, 3%, and you can invest that money at something higher than that, if you can invest it at 5%, 10%, 15%, 20%, then of course you should do it. You can take somebody else’s money. They’re going to charge you a fee of 2% but you’re going to put that money out in the marketplace, and it’s going to grow at an annual rate of again let’s say 10, 15, 20%, you’d be stupid not to do that. You have an opportunity before you. With interest rates being so low, if you own your home you’ve got this equity sitting here, get it out, get it into the marketplace and let it grow. Put it to work for you rather than just sitting there in jail doing nothing.

Again, the flip side of that is if you can borrow at 3%, invest at 10, the flip side is don’t put your money, that extra money that you have, don’t put it into the mortgage to pay off a measly 2.5% interest or something like that. You see that interest, that mortgage hanging over your head. It’s only a 2-1/2% or 3%, whatever it is, mortgage. Use your smarts, get educated, buy an investment property and get that money working at double digits and earning double digits for you, which is much, much better than eliminating the pain, so to speak, of the 2% or the 3% on the other side. Get it working for you at 10, 15, 20%. That is much, much better.

There you have it. That’s my little rant for today on this issue of paying down your mortgage. Now obviously, not everyone will agree with me and that’s okay. There’s a common thread again to people who’ve grown wealthy over time and that is they understand this concept, they use debt to their advantage and they are not afraid of debt. There’s nothing to fear in debt. That’s enough for today. Until next time I hope you have a great week.

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